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Big Inflation Coming 3

By: Adam Hamilton | Friday, November 9, 2012

Well, Americans voted and the winner is inflation. Half our voting
populace inexplicably decided to award a second term to Obama. Four more years
of mind-boggling record deficits and record national debt growth! Obama's Administration
spent roughly 50% more than the government took in, which can essentially only
be financed in two ways. Borrowing from foreigners and running the printing
presses.

The latter of course is pure inflation. And the Fed bent over backwards with
its quantitative-easing campaigns
to buy massive amounts of the Treasury debt Obama ran up on our children's
credit cards. It created trillions of new fiat dollars out of thin air to
purchase Treasuries to finance Obama's trillion-dollar-plus annual deficits.
And with Obama sticking around, this dangerous trend is only going to accelerate.

The ironic thing is inflation wreaks the most damage on the people with the
least. Its corrosive effects on purchasing power are felt most at the margin,
among the poor and minorities whose overwhelming support of Obama carried him
to victory. They apparently didn't care about the crushing unemployment rates
among blacks, Hispanics, and the young from Obama's policies, but they will
care about inflation.

Inflation is a simple supply-and-demand phenomenon, economics 101. When the
supply of money grows faster than the economy, the underlying pool of goods
and services on which to spend it, it takes more money to buy anything. Relatively
more dollars are competing for relatively fewer things, bidding up their prices.
With more dollars in circulation, each one is worth less. So prices inexorably
start rising.

For most of the half of Americans working hard enough to actually owe income
taxes, inflation's price impact is generally manageable. I don't care if my
bills double next year, I can afford it. But for everyone on fixed incomes,
including all the Obama supporters receiving debt-financed government checks
for welfare or social security, inflation is devastating. Deficit-driven rising
prices will slaughter them.

Unfortunately inflation is widely misunderstood, which is just the way the
pro-big-government Democrats want it. They need to spend far more money than
the productive American taxpayers can pay in order to bribe the unproductive
lazy for votes. And if they can convince the Fed to print money to "pay for" all
this excessive spending up front, the tremendously negative economic impact
can be hidden for years.

Inflation is the most nefarious and regressive stealth tax possible.
It slowly strangles and starves the poor, who lack the resources to avoid it.
Meanwhile the rest of us simply deploy our capital in tangible assets like
gold, silver, and real estate that will preserve our purchasing power through
the inflation. So Washington has a huge vested interest in keeping Americans
as complacent as possible about inflation.

Thus the primary inflation gauge, the US Consumer Price Index, is heavily
watered down. A wide variety of statistical manipulation and subterfuge is
deployed to make prices look like they aren't really rising as fast as they
are. Per the CPI, prices have only risen 9.6% since Obama took office. This
is about 2.4% a year. But if you look at your own financial records, you'll
find your expenses rising far faster since then.

Many contrarians believe the true price-inflation rate in the States is closer
to 8% to 10% annually, which certainly seems far more realistic given
how fast the costs of living are rising. One of the best ways to get a read
on future inflation is to look at its cause, monetary expansion. If
you want to estimate how much smoke is going to be produced, start by investigating
the fire. The Fed's monetary growth has raged.

If the Fed insists on helping to finance Obama's rampant overspending by ramping
the US dollar supply much faster than the US economy is growing, then rising
prices are inevitable. Once this new money has been created by the Fed, it
is baked into the pipeline. History has proven countless times it will eventually
adversely impact price levels as too many dollars start chasing too few goods
and services.

The broad measure of the US money supply today is known as MZM, or money of
zero maturity. It is a liquid measure that includes all currency, checking
accounts, savings accounts, and money-market accounts redeemable on demand.
It excludes time deposits such as certificates of deposit. Since it is the
best US-dollar-supply yardstick available today, it is also probably the best
indicator of future inflation.

This first chart looks at MZM over the past 9 years, Bush the Younger's last
term and Obama's first. The yellow line is the actual MZM money supply reported
weekly by the Fed, in trillions of dollars. The blue line shows its absolute
annual growth. Finally for comparison's sake, the year-over-year growth of
the CPI is also shown. Though its custodians try to hide rising prices, it
is somehow still widely accepted today.

During most of Bush's second term, before he appointed the notorious inflationist
Ben Bernanke to take the Fed's helm, MZM growth tracked closely with CPI growth.
The Fed gradually increased the money supply, so prices only gradually rose.
Rather conveniently for Bernanke, an academic with a long pro-inflation record,
the Bureau of Labor Statistics changed its CPI's methodology in mid-2006 shortly
after he assumed office.

Politicians get uncomfortable with headline inflation above 4%, as Americans
start to become aware of it. It also drives up the interest rates the US Treasury
has to pay on its debt, making borrowing more expensive so politicians are
forced to spend less. So the BLS bowed to its political masters and revised
its index to more aggressively edit out rising prices. Maybe if it would simply claim inflation
wasn't a threat, its real-world impact would magically vanish.

Bernanke started seriously ramping MZM growth in late 2006 and 2007 in response
to the subprime crisis. His academic career had been spent asserting that no
matter what the problem, injecting more money into the system is the solution.
He believes the Great Depression happened because there was too little inflation!
And as the mighty Fed Chairman, he could put his theories and research to the
test.

The MZM growth rate surged in 2007 and early 2008 as a global-stock selloff
arrived hot on the heels of the US mortgage meltdown. The broad US money supply
rocketed by 8%, 10%, 12% annually. At its peak growth in early 2008, MZM was
up a staggering 16.4%! The number of dollars in circulation ballooned by nearly a
sixth in a single year, yet the underlying US economy in which to spend
them lagged far behind.

Soon general prices were rising so fast that even the heavily massaged CPI
couldn't mask reality. So its growth started surging dramatically in late 2007
and early 2008, ultimately hitting 5.6% in the summer before the stock panic.
There was still a huge gap between true monetary inflation and its popular
gauge, which was pretty suspicious given the 2006 methodology change to blunt
the CPI's price-level read.

The Fed's gigantic money-supply growth spike in response to the mortgage crisis was
never unwound, and shortly after 2008's once-in-a-century stock
panic hit. So the Fed responded again the only way it knew how, flooding
the system with new fiat-paper dollars. When your only tool is a hammer,
everything looks like a nail. Since the printing press is the extent of the
Fed's arsenal, it is quick to spin it up for anything.

MZM growth remained staggering during 2009 in that first post-panic year,
averaging 10.2%. But once things stabilized a bit in the markets, the Fed tried
to turn off its spigots before all its new dollars kindled some hellacious
price increases. But MZM growth only went negative briefly, which barely made
a dent in the existing money supply. The Fed's epic 2007-to-2009 money-supply
growth stayed in the system!

Thanks to plunging commodities prices, which have nothing to do with monetary
inflation, the BLS reported sharply-falling CPI growth during and after the
panic. But since all that new money remained in the pipeline, it soon started
to manifest itself so decisively that even the BLS's statisticians couldn't
massage the rising prices out of their reports. Ever since, even CPI inflation
has been trending higher.

Largely in direct response to stock-market weakness, the Fed launched a series
of debt-monetization campaigns between early 2009 and today. Under the benign-sounding
label of quantitative
easing, the Fed created trillions of dollars out of thin air to
buy up mortgage and Treasury debt. Make no mistake, if Bernanke's Fed
hadn't done this there is no way Obama's deficits could have ballooned so gigantic.

Without the Fed's inflation directly monetizing Treasuries, demand
would have been much lower and therefore interest rates would have been much
higher. The free markets would have forced the profligate Obama Administration
to act more responsibly, to get closer to living within its means like everyone
else has to. But thanks to the Fed, Obama was able to run record deficits to
mushroom our debt by record amounts.

Broad money-supply growth reflected this, surging back up to the 8%-to-10%
range in recent years that was previously only seen in severe crises. This
excessive growth resulted in a massive new surge in the US-dollar supply. All
these new dollars have to go somewhere, so they are bidding up the prices of
goods and services as the stunted Obama economy struggles near stall speed.
Big inflation is already baked into the pipeline!

Even the watered-down CPI is reflecting this as it gradually trends higher.
And since half of Americans apparently loved Obama's crappy economy and record
deficits and debt growth, this trend is only going to continue. Obama will
keep spending vastly more than the taxes Washington can take in, which will
force his lapdog Fed to keep conjuring dollars out of thin air to inject into
the system to monetize this debt.

Since Obama's dark reign began in January 2009, the broad MZM money supply
has soared 20.7%. This is far closer to the true inflation rate than the CPI's
9.6% rise. But for some technical reasons from the way the Fed calculates MZM,
I suspect the true Obama inflation rate is higher. Between the day he took
office and this week, the ultimate inflation investments of gold and silver
rocketed 100.6% and 185.1% higher!

Some economists argue that the narrow money supply is a superior inflation
indicator to the broad money supply. And the narrowest measure is known as
the monetary base, or M0 (zero). It is simply the physical currency (paper
and coins) in circulation, currency in bank vaults, and the reserves commercial
banks have on deposit with the Fed. This is the base of all money we use for
all our daily transactions.

It is called the monetary base because it is the foundation from which fractional-reserve
banking multiplies the money supply. It is the high-octane core that ultimately
controls the size of the rest of the money-supply measures. And as this half-century chart
shows, the Bernanke Fed's growth of the monetary base has been staggering beyond
belief. This seriously heralds big inflation coming.

For 48 years before the stock panic and the plague of Obama, the average
annual growth in M0 was a fairly reasonable 6.0%. This wasn't too far beyond
the baseline growth in the US economy, so inflation was moderate. But during
the stock panic, Bernanke truly panicked. This great inflationist literally doubled the
monetary base, sowing the seeds for incredible inflation whenever the multiplier
kicks in.

Though this unsustainable growth soon abated, it recently surged again. This
resulted in post-panic average M0 growth of 34.6% annually! Note that the Fed
never unwound either the gargantuan panic spike in the monetary base nor the
recent smaller spike. All this incendiary inflation fuel is still in the
system. Shortly before Obama took office M0 was near $0.9t, and since then
it has nearly tripled to $2.6t!

Now pro-big-government Keynesian economists often argue that money-supply
growth doesn't matter if the banks aren't making loans and effectively multiplying
it. And that may be true over the short term. But all throughout history all
around the world, governments and central banks have found that the inflationary
genie can't be stuffed back into the bottle once it is unleashed. There is
no turning back.

With both narrow and broad money supplies surging dramatically higher in recent
years, price levels will keep on rising. The dollar supply has grown vastly
faster than Obama's weak economy, leaving relatively more dollars chasing relatively
fewer goods and services. Record monetary growth, the underlying fire, will
eventually create record inflation, the billowing smoke. Bernanke's financing
of Obama's overspending guarantees it.

This past week Americans had a rare opportunity to reverse this monetary disaster,
to force Washington to live within a budget and spend less than it takes in.
But half of our peers decided the economy didn't matter. They were more
worried about whether or not they could murder their babies in the future,
or celebrate the destruction of traditional family values, or do drugs, or
live illegally in the US, or get paid from their neighbors' incomes for sitting
around doing nothing.

So we will all reap the whirlwind. Obama's victory, no matter how narrow,
validated his failed policies. Americans foolishly rewarded him for his disastrous
economic mismanagement, guaranteeing more of the same. He will continue to
run huge deficits that fuel enormous debt growth. And the Fed will continue
creating new money out of thin air to partially finance this excessive government
spending.

Obama's first term saw big inflation even though the manipulated CPI attempted
to obscure it. Don't take my word for it. Go back and review your own financial
records from late 2008, how much you were paying for housing, food, gasoline,
utilities, education, insurance, and other necessities of life. After just
one Obama term, the Fed flooding the world with dollars has dramatically raised
general price levels.

And with Americans just patting Obama on the head and telling him great job,
give us four more years, what will he do? Keep on overspending, aided and abetted
by the Fed. The inflationary fruits of Obama's first term have yet to fully
roost, and these problems will be greatly exacerbated by his second. Big
inflation is coming, and ironically it is going to hurt those the most
who voted for this incompetent fool.

Thankfully while Obama's poor supporters starve as inflation prices food and
shelter out of reach for them, the rest of us have a fantastic refuge. Gold
and silver. As mentioned above, during Obama's first term the gold price
doubled while silver nearly tripled! And since it takes money-supply
growth time to work its way through the system and bid up prices, much of the
last four years' inflation is still coming.

And with the Fed fully onboard the big-government bandwagon with its inflation
engine already running full steam, the next four years look to be far worse.
So if you aren't already invested in gold, silver, and the stocks of their
best miners, don't delay. This imperative is even more urgent since Obama's
win will almost certainly bludgeon the general stock markets into a new
cyclical bear market now due anyway.

At Zeal we are ready. We've been loading up on fantastic high-potential gold
stocks and silver stocks since
this past summer, when their prices slumped to incredibly undervalued and
oversold levels. We continued adding new positions aggressively in October
during a short-lived gold
seasonal slump. And now since half the voters wanted more of Obama's disastrous
policies, inflation will be supercharged.

Join us, we will thrive in the next four years despite the headwinds just
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The bottom line is big inflation is coming. As Obama recklessly spent 50%
more than our government could take in, the Fed inexplicably decided to aid
him in running these record deficits. So it accelerated its monetary growth
towards panic-like levels, even directly creating new dollars to monetize Treasuries.
All of this inflation is already baked into the system, and it will inevitably
keep bidding up general price levels.

And then half the American electorate bizarrely decided trivial peripheral
issues were more important than feeding their families. So they ordered more
of the same, and won. Now we are in for four more years of gigantic deficits
and debt growth, and enormous monetary expansion to partially finance it. The
best refuge for prudent investors is the precious metals. They are poised for
a massive inflation rally.

If you have questions I would be more than happy to address
them through my private consulting business. Please visit www.zealllc.com/financial.htm for
more information.

Thoughts, comments, flames, letter-bombs? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that
I am not able to respond to comments personally. I WILL read all messages though,
and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst,
publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis
of markets, geopolitics, economics, finance, and investing delivered from an
explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for
more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to
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